Tide may be turning for Indian tile makers on improved demand outlook

Market share gains from unorganised players, better demand visibility, and improving operational performance are the key long-term triggers for Indian tile makers, which are at 52-week highs on the bourses.

The Indian tile industry is estimated to be worth nearly Rs 39,000 crore per year. Of this, 35 per cent or approximately Rs 13,500 crore comprises exports, which are largely catered by Morbi-based players (roughly Rs 10,000 crore in FY20).

China, which is the world’s largest ceramic tiles exporter, has seen its share in global exports decline from 40 per cent in 2015 to 31 per cent in 2018, as several countries, including India, the US and the UK, imposed anti-dumping duty on imports. Analysts say China's share is expected to decline further as exports from India gather steam.

Channel checks conducted by ICICI Securities suggest export momentum continues to be robust after an initial jump in July 20 (after unlocking), with revenues expected to touch Rs 12,000 crore in FY21. Reduced pressure in the domestic market also bodes well for the branded players, say analysts.

“Kajaria cited market share gains in Q2FY21, as Morbi players continued to focus on exports (30-40 per cent of their production). Export focus is mainly led by the US imposing anti-dumping duty on Chinese tile exports and Covid-19 impacting key exporters like Italy and Spain. This is expected to alleviate competitive intensity and sustain pricing stability in the domestic tile market,” said Jefferies.

Domestic demand, too, is seen contracting less than expected in FY21, aided by healthy retail demand. A pick-up is expected in the next financial year.

“Demand from institutional real estate, constituting 65 per cent within the domestic market, is expected to decline 35 per cent year-on-year in the current financial year, as fresh construction activity has moderated,” said CRISIL Research. However, retail demand is expected to grow 15 per cent, mainly from tier 2 and 3 cities, cushioning the fall to an extent, it added. As the focus on infra and housing increases, there could be a higher demand for tiles going ahead.

Importantly, operating profit margins are likely to remain steady despite the marginal increase in gas prices (about 22 per cent of the total cost for tile makers).

“Improvement in the product mix, higher operating leverage, and cost-saving initiatives undertaken by companies in the wake of the current pandemic are expected to keep Ebitda margins firm in the second half of the financial year,” said analysts at ICICI Securities.

They estimate Kajaria Ceramics and Somany Ceramics to post a compound annual growth rate of 16 per cent and 14.5 per cent in revenue during FY21 - FY23.

Increase in competitive intensity, pricing pressure and tapering off of demand are some key risks that analysts highlighted.